Why and when your board is important to your family business
Your board of directors is the central institution in the governance of your family business, like for most companies. The role, structure, and composition of your board of directors vary depending on the size and complexity of your business and the maturity of your owning family.
During the first years of their existence, most family businesses like yours create a board of directors in order to comply with legal requirements. Known as a “paper board”, its purpose is usually limited to approving your company’s financials, dividends, and other procedures that require board approval by law. These boards usually meet about once or twice a year (depending on the local regulation) and their sessions last for a very short period of time. Your board in this case is generally composed exclusively of your family members and, in some cases, a few well trusted, non-family, senior managers. It is also very common to see the same individuals serve as managers and board directors, while being the company’s owners. Roles are often mixed, possibly leading to conflicts and inefficiencies in overseeing your company and its strategic decision.
As your family business gets more complex, it becomes necessary to rely on a more professional board to play an active role in important matters, such as setting your company’s strategy and reviewing its management performance. These tasks require your board to meet more often. It also requires your board to have the necessary expertise and independence to challenge your company’s management, acting in the best interest of your business, independently from your management and controlling shareholders. This is when your family business board becomes more organized, well-focused, and open to outside, independent directors.
Advisory board: the ‘compromise solution’
Before moving to a fully professional board many family businesses like yours set up an advisory board that complements the skills and qualifications of their current directors and family members. In this case, the advisory board closely works with the company’s board of directors and senior management to address any key strategic issues that the business is facing.
The most practical size for your advisory board is from 3 to 7 members, usually made up of experts in your family business’ industry and market, or in other areas such as finance, marketing, and international markets. Members of your advisory board should not be: suppliers or vendors of your company, friends of your owners with no relevant expertise, existing providers of service to your company (e.g., bankers, lawyers, external auditors, consultants), or overcommitted individuals with no time to complete their mission correctly. The CEO and a few senior managers from your family business can also be part of the advisory board in order to coordinate and orient the meetings’ discussions towards the company’s needs.
Board of directors
Directors are elected by your company shareholders and are supposed to act in the best interest of your company and to exercise care in doing so. To do so, they perform their duty of care and duty of loyalty.
A well-performing board will help you set the overall strategy of your firm and oversee the management performance. It will ensure that an appropriate corporate governance structure is in place, in particular to secure the succession of your senior management. Your board will also ensure the availability of financial resources, adequacy of the company’s internal controls and risk management systems.
With 5 to 9 members you should be able to get an increased efficiency as directors will have better chances for communicating, listening to each other and keeping the discussions on track.
Establishing a strong and independent board is a wise decision that most families in business like yours take once their company’s operations reach a critical size and complexity. A study conducted by John Ward in ‘Creating Effective Boards for Private Enterprises’ (Family Enterprise Publishers, 1991) in the United States of more than 80 family-owned companies run by the third or later generation, showed that the existence of an active and outside (non-family-controlled) board was the most critical element in the survival and success of these companies.
Some of the advantages for you to have an independent board of directors include:
- Bringing an outside perspective on strategy and control.
- Adding new skills and knowledge that might not be available within your company.
- Bringing an independent and objective view from your family.
- Making hiring and promotion decisions independent of your family ties.
- Acting as a balancing element between the different members of your family and, in some cases, serving as objective judges of disagreements among your family-member managers.
- Benefiting from their business and other contacts and connections.
Criteria for a good board director
For more information,
- Learn about IFC definition of ‘independent’ director in IFC Family Business Governance Handbook
- Consult John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991) here
Explore more resources about IFC Family Business Governance
- How strong is your governance? Try out the Sample Listed Family Business Governance Self-Assessment Tool
- Why it is important to start planning the governance of your family business
- What governance is adapted to your family business growth
- Is succession planning taboo in your family business
- Roles and conflict resolution in your family business
- Communication and conflict resolution in your family business
- Family managers versus outside managers in your family business
- Setting up the shareholder policy of your family business